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Month: June 2018

Smart Investing made easy begins with doing your background research, building your personal investment strategies and diversifying your investments. Your financial future depends on your smart investing or you could lose a tremendous amount of money quickly. With proper research, a good thought out investment strategy and some help from a personal financial planner and you should be able to see your investment returns increase.

Research Your Investments and Options for Smart Investing Made Easy

Smart investing requires a lot of thought on your part, before you can develop a strategy for your investments with a personal financial planner. What investment strategies make the most sense for you and your family? What are your investment goals, what do you want to accomplish? Are you investing to put kids through college? Maybe you want to buy a new house or you are trying to set yourself up for a comfortable retirement. You need to know the risks involved and what expenses that may occur with that particular investment. Someone who is about to retire is going to be much more conservative in their investing style than a young person who is just starting out and does not yet have a spouse and kids. Taking a look at personal needs and then taking the time to find the answers can make decision making with a financial planner much less overwhelming.

Your Personal Investment Strategy for Smart Investing

The next step is to make a plan and build a strategy to work your plan. This is where a good financial planner with his in depth knowledge can really be a big help. The financial planner can guide you to make the best decisions as to how best to invest following your criteria for risk and meeting your personal goals. It is very important that you remain up front and honest about your risk tolerance, everyone is different.

Your personal investment strategy is a road map for a life time of smart investing made easy. Through good research, knowing what you want to accomplish, setting goals and working with your personal financial planner to make those investment goals attainable, you will be well on your way to financial freedom. Although you can work with a good financial planner, I believe that since you are ultimately in charge of your money, it is your responsibility to understand the mechanics of investing. Once you have learned and mastered this, you are well on your way to a life time of financial freedom and opportunities.

The easiest way to derail a good stock investment strategy is to bring emotion into the game. Stock securities are little pieces of a company. While human beings are very emotional creatures, the little slips of paper that represent the countless stock trades occurring every single day have no emotion. Furthermore, large institutional investors, who have the largest influence on a stock price because of the size of their trades, operate by a series of trading rules that once again have no emotion as part of the equation.

For you and I, trading stock is partially a psychological game. It’s a battle between our ability to make rational decisions and our tendency to get caught up in emotions of fear, greed, and a desire to be right. Without some fancy neurological operation or disfiguring industrial accident, emotion is a part of the way all of our brains operate. Therefore, it doesn’t do any good to pretend that we don’t have emotion.

Instead, learning how to recognize emotional response is the key to controlling it. This is especially important when money and tight deadlines stare you in the face. To practice recognizing emotions, keep a small journal and as you look at each stock price in your portfolio note any emotions that you feel when you first see the price. Be honest with yourself because this is important. If you a saw price drop below your buy price do you feel a pang of dread in the pit of your stomach? Do you feel yourself justifying why you bought the stock in the first place? Is this followed by thoughts of why you should hold on to the stock to prove to yourself or someone else that you were right?

Rational thinking follows emotional responses. However, rational thinking is also colored by emotional responses. This is why it’s important to recognize when you have these emotional responses, whether good or bad, so you can put yourself back on track and objectively evaluate whether or not you should stick with the stock or get rid of it.

Emotions can also play with your head when the stock is doing well. In my early days of trading I had a stock skyrocket and I was elated. I would look at that one stock and think about how it proved that I knew what I was doing. Rationally the math told me that I had already made plenty of money and it would be a great thing to sell the stock immediately and take the cash.

That’s not what I did.

Instead I rode the stock through the end of the day and into the next morning. Before the markets opened that next day, a press release had come out about this company and while the news wasn’t horrible, it wasn’t positive either. By the time I was able to trade stock that day, major institutional investors followed their standard policy and dumped the stock, driving the price down. My emotions took hold on this loss as well. To make a long story short, what would’ve been a great financial gain became a substantial loss. Institutional investors are sometimes timid about buying back into a stock and once they have started the trend that drives the price down many private investors smartly follow as well.

Looking back on this particular stock I would’ve had to hold on to it for another year just to break even.

This was a tough lesson to learn, indeed. And that’s why emotion should never be a part of your stock investment strategy.

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The availability of investment news and information has been increasing over time. This has led to an improvement in most people’s understanding of general investment concepts. It has created the opportunity for many to choose to manage their own financial affairs.

Knowing “where” to invest your money is an important part of the financial management equation. However, by itself, it’s far from comprehensive in terms of an investment strategy.

Consider the Storm Financial model of advice.

They used an eminently sensible and highly diversified investment approach for managing the underlying investments for their clients. Their investment strategy at this level was not the cause of the problems their clients would eventually experience. Simply knowing “where” to invest their clients’ funds was not enough to save their clients from financial disaster.

They failed to adequately address:

The size of the investment exposure relative to their client’s lifetime capital accumulation amount (i.e. the question of “how much” to invest), and
How to manage the entry risk for their clients (i.e. the question of “when” to invest).

This part of their investment strategy was not only grossly naïve, it failed to adequately address the personal circumstances of each investor.

The strategic decisions they applied seemed to be based on:

“how much?” = as much you can borrow, and
“when?” = as soon as possible.

Apparently, this strategy was applied regardless of whether the client was a young accumulator or an elderly retiree.

How personalised is your investment strategy?

Many investors confuse personalisation of an investment strategy with choices at the specific investment level (e.g. I prefer BHP over Rio Tinto, or Australian Shares over International Shares). While this is a form of personalisation, it generally doesn’t add any long term (risk adjusted) value. In fact, personalisation at this level generally has a long term cost.

It may help to retain a client though, or convince a DIY investor to continue with their approach over other (more generic) alternatives.

True personalisation of an investment strategy is at the broader level of managing investment risk exposure over time. Arguably, this will have a much greater impact on your long term wealth than a strategy that focuses purely on your specific investments.

The “default” investment strategy

The natural investment strategy for most households is driven by the availability and timing of surplus cash.

Generally, households tend to generate more savings in the latter years of their working lives than the earlier years. It is not uncommon for households to invest over ¾ of their lifetime capital accumulation within 10 years of retirement. In the years prior to this, surpluses are used to reduce mortgages, fund school fees and buy lifestyle assets such as cars, boats, renovations, etc.

The dilemma for many who unwittingly apply this “default” strategy is that they acquire most of their investment exposure over a relatively short investment horizon. If these acquisitions happened to be at the end of a cyclical bull market, it could have quite catastrophic implications.

On the other hand, if you were lucky enough for your pre-retirement years to coincide with a cyclical bear market, you could end up acquiring a lot more market exposure than you would have under more optimistic conditions. The challenge for these investors is to recognise their good fortune. Many fail to do this and shy away from investing during declining markets.

Your investment strategy shouldn’t rely on luck

An investment strategy that may not differentiate at the specific investment level but sets a clear and personalised strategy for managing your investment exposure over time is much better than one that differentiates at the specific investment level but ignores the bigger picture.

A smart investment strategy considers much more than the investment of your current capital. It takes into account your projected savings capacity, the timing of these savings and your risk parameters to build a strategy that reduces the element of luck and focuses on giving you the best chance of achieving your objectives.